In a Downtrend

The indices didn't reflect it but it was a very chaotic day. Panic selling in the morning led to a big bounce, but breadth was still solidly negative with 2,000 gainers to 3,600 decliners. We also saw about 50 new highs and 150 new lows, which is not a climatic reading.

This action is what we need to get to a good low, but it is still too early in the process to declare the all-clear. It is interesting to see this sort of correction action, which is unlike anything we had in 2013. Eventually, we'll have a much better market for having gone through this action but it is going to take time to play out.

Twitter (TWTR) earnings are out and are pretty good but expectations have gone sky high after Facebook's (FB) report. There just isn't enough to keep the momentum going, plus analysts hate the valuation. I don't expect many positive comments on it in the morning.

Don't forget that the jobs report Friday is going to be the next major market catalyst. We also have interest rate news out of Europe overnight and that is going to move things as well. My feeling is that we need good economic news to get this market back on track. A cut in rates or more quantitative easing isn't going to light this market up like it did in the past.

The market is in a downtrend, and countertrend bounces are failing. Make sure you keep that in mind as you contemplate positions. There will be time to add exposure as this correction plays out.

Have a good evening. I'll see you tomorrow.

Feb. 05, 2014 | 1:47 PM EST

Emotions Return to the Market

It isn't good action but it's beneficial to traders.

The market continues its tendency to revert to "old-fashioned" action. Today we actually had a panic washout that led to a strong reversal. It was downright grim this morning but the intense negativity helped produce a classic panic and reverse.

I can't recall the last time we have seen that sort of reversal. What has been much more common is that the overly aggressive dip-buyers never allow us to experience any real panic. They are buying before folks are scared out, which prevents the sort of purges that refresh the market.

The market bounced early in the day and I'm not ready to conclude that it was enough of a panic to bottom out this downtrend, but it is what we need to produce better action. It will be interesting to see if the buyers keep pushing as they did all of last year. I suspect they won't and we'll see flipping into the close.

The market continues to act as if human beings are controlling the action again. Emotions are coming into play and the psychology is making more sense. It isn't good action but it is logical, and that is beneficial to traders.

Feb. 05, 2014 | 10:30 AM EST

Market Mood Is Grim

Cash is the place to be while this plays out.

Although I was doubtful about the ability of the market to pull off a V-shaped bounce, I didn't expect such downright ugly action today. We are now working on our third failed bounce in the last two weeks. It is even uglier than indicated by the indices as breadth is atrocious and recent safe havens like Tesla (TSLA) and Facebook (FB) crumble.

Another sign of problems is how quickly a sharp bounce on a slightly better-than-expected ISM services report was sold. The strength didn't last but a few minutes before it was hammered down to a new intraday low.

We are now in danger of taking out Monday's lows and the market mood is growing grim. The dip-buyers are getting hit and the underlying support is very weak.

I've been hearing talk that maybe bad jobs news on Friday will cause the Fed to taper the taper but at this point I believe we are beyond the "bad news is good" thinking. This market wants something positive and a slowdown in tapering isn't going to excite buyers much. We need economic positives rather than more efforts by the Fed to save us.

I took a few stops and I am just standing aside for the most part. Some of the damage is severe. Cash is the place to be while this plays out.

Feb. 05, 2014 | 8:23 AM EST

Don't Bank on the V-Shaped Bounce

Stay selective and book profits quickly.

Pain is inevitable. Suffering is optional. --M. Kathleen Casey

Is the correction over? Have we seen the lows?

In 2013 that answer to those questions would have been an emphatic "yes." Not only would a weak bounce, like we had on Tuesday, signal that the market has found support, but it would be the start of an impressive run straight back up. The fact that volume was light and the buying was sedate would be irrelevant. Once we bounced a little, it was clear sailing to the upside. The idea that we could gain momentum to the downside was just plain ridiculous.

Unfortunately, the market in 2014 hasn't acted much like the one we had in 2013. The patterns and tendencies have shifted as overall market character has undergone a transformation. No longer is weak economic news shrugged off because of comfort that the central bankers will continue to bail us out with endless cheap money and financial engineering.

The big shift that the market is grappling with now is that bad news really is bad news. We've had a poor earnings season, economic news (especially PMI reports around the world) have been below expectations and no one is looking to central bankers to bail us out this time.

When the market breaks down, like it has over the past few weeks, the standard response of momentum traders is to take a defensive posture. When the trend shifts, you react and then wait patiently for conditions to improve. That proved to be a poor approach in 2013, which is why so many market players have been slow to react this time. They are counting on a quick bounce back up to bail them out. The problem is that if it doesn't happen that way again then the potential for even more downside is greater if they start to panic and look for exits.

At this point I am looking for the market to continue to try to bounce for another day or two before we are confronted with the January jobs news on Friday morning. I suspect that will be the catalyst for the next move in this market.

For now, the most important issue is that we hold above the low we hit on Monday, which is around 1740 on the S&P 500. That is where the sell stops are set and a breach there will cause some dumping. Overhead resistance is around 1770, which is a long ways to go. I don't expect us to make that run without a positive economic catalyst such as good jobs news on Friday.

It is a trading-range market with a negative bias at the moment. Stay very selective, keep timeframes short and don't hesitate to book profits when you have them. The V-shaped bounce isn't going to save us so easily this time.

We have a slightly negative open and not much excitement in the early going. Twitter (TWTR) reports tonight and will be the main source of conversation today.